Outsourcing

Getting the measure of it

Ignorance and the fear of offshoring

“THERE is little hard evidence of the extent of international outsourcing and offshoring,” said a recent report from the OECD, “despite widespread media attention.” That attention has tended to portray outsourcing—the contracting of once-core business functions to an outside supplier—and, in particular, its overseas component, offshoring, as a threat either to millions of jobs in Europe and America or to the security of sensitive data handed over to flaky foreigners by western banks.

On June 23rd the Sun, a British tabloid, said that it had bought the bank-account details of 1,000 Britons from an intermediary in Delhi who worked for an Indian outsourcing firm. Two days later the story appeared in the Washington Post, headlined “Outsourcing in India in Crisis over Scam”.

No one knows the exact size or shape of offshoring. There is no doubt that firms today use outside suppliers (some of them overseas) to do many of the things they once did themselves. These range from running call centres supplying customer services to payroll processing, software engineering and even research and development. Last month the McKinsey Global Institute, the consulting firm's internal think tank, published a report on the subject. Called “The Emerging Global Labour Market”, it began by saying, “So far, the debate about offshoring has been fuelled by anecdote rather than fact,” and then set about gathering hard data.

Extrapolating from a study of eight industrial sectors, the institute calculated that in 2003 there were 1.5m service jobs outsourced abroad from developed countries. By 2008, it reckons that number will have risen to 4.1m. To set that in context, it points out that “an average of 4.6m Americans started work with a new employer every month” in the year to March 2005.

The OECD confirms that “even the largest projections of ‘jobs lost to offshoring' are relatively small in comparison to general job turnover.” Moreover, although India is undoubtedly the biggest recipient of offshoring jobs, developed countries too rank high on the lists. The OECD looked at the value of exports of business services as a proxy for offshoring in 1995-2002, and found that growth was greatest in India. But among the ten fastest-growing exporters over the period were Estonia, Ireland and Sweden, all of them now member states of the EU. “European firms,” says the OECD, “tend to offshore within Europe”—with the notable exception of British ones.

Limits to the growth of offshoring are already appearing. Technology, which made it possible to shift such work abroad in the first place, is now helping to bring it back. Banks are starting to use automated call centres, for instance. In Britain, Lloyds/TSB, Halifax and Egg are all using a system provided by Adeptra. It lets them call customers and make anti-fraud checks on credit-card transactions, say, without the use of a human voice. Such operations are firmly based in a bank's home country.

Then again, says the McKinsey Global Institute, if current demand continues, the supply of suitable labour in the popular cities of Prague and Hyderabad will run short by 2006 and 2008 respectively. The demand for engineers from Britain and America alone, it claims, will use up the suitable supply in all of China, India and the Philippines by 2011. The institute advises firms to choose their locations carefully. It is hard to switch later “because of sunk costs in physical and human capital”.

India's popularity with British and American firms, the biggest outsourcers by far, has been helped by the fact that English is widely spoken there. China's lack of language skills has been a constraint on its ability to compete in this market. But Jia-Bin Duh, president of Cisco Systems' Chinese operations, said recently that the Californian supplier of routers for the internet currently spends 25% of its global outsourcing budget in China, and that this will rise to 40% by the end of 2006.

Outsourcing's popularity derives largely from the huge cost savings it can bring and the value it can create. A study published this week by LogicaCMG, an Anglo-Dutch outsourcing firm, says that the shares of British quoted firms, after announcing outsourcing deals, outperformed comparable firms without such a deal by an average of 1.7% in the month after the announcement. Studies in America report even bigger gains. LogicaCMG says that, if British firms increase their outsourcing by half by the end of the decade, an extra £10 billion ($18 billion) will be added to their stockmarket value.

The striking bottom line? According to the OECD, close to 20% of total employment in the 15 pre-expansion EU countries, America, Canada and Australia could “potentially be affected” by the international sourcing of services activities.